Multifamily Market Updates: October 2021

Hello!

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2021 will set records across the board for investors in almost every category, especially multifamily investing.  For the Inland Northwest specifically, records are being set for multifamily transaction volume, price-per-unit, price-per-square-foot, rent growth, and more.  What’s driving this and what’s in store for 2022?  Read on to learn more.

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Overall Market

• This month I compiled the data I track on every transaction in Eastern Washington for Q3 2021 and every deal under contract today.  The data is too dense for this newsletter, so reply via email if you want the detailed breakdown and I’d be happy to send it to you.  (At a high-level, there are sales of up to $332M in just the second half of 2021.)
• Local Inland Northwest markets each have unique characteristics, employment drivers, submarkets, and culture.  The growth these markets have seen in population, employment, and investment activity in 2021 has helped fuel each local economy in its own way.  This is particularly exciting for current owners, investors, employers, and anyone who was early to the trend!
• I personally enjoy walking each investor through each market and its differences to help them make the right investment in each market.  It’s a key aspect of my role as an Inland Northwest Advisor – equipping owners and investors with up-to-date market data, the right team members, and any other services they need.  Need input on something you’re working on?  Reach out any time, I’m happy to be a resource.
• This growth has attracted attention from major markets like Seattle, Portland, Boise, and California markets.  This is great news when buyers and businesses come from other markets with capital to deploy and boost the local economy!
• On the flip side, investment data in the Inland Northwest is not as readily available as it is in major markets.  This can lead to poor decision-making and bad investments, ultimately leaving money on the table for owners and investors.  Here’s a situation I encountered this month:

• An out-of-town multifamily owner listed his Tri-Cities property for sale with a broker from a major west coast metro, for what seemed like a fair price when looking at price-per-unit.  But the broker missed key information in marketing the property: when looking at rent comps nearby, it appeared that market rent was $1.10/SF.  Our proprietary data shows that $1.35/SF is achievable, meaning more rental upside and ultimately a much higher value for the current owner.  With this key detail, the owners potentially left $1.7M (or a 32% increase) in property value on the table!  It takes close knowledge of the submarket and personally tracked data to ensure Sellers realize full value, and Buyers have an educated, well formulated action plan.

• The key takeaway here:  Real estate is inherently local and having a local expert can make all the difference, to the tune of millions in profit.  I am personally excited about the future of our local markets in years to come and am glad to play a part in that growth, even if in a small way. 
• I look forward to working with buyers, sellers, and brokers who are looking for boots on the ground to aid their clients investment decisions.

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Multifamily

• From the data I track on the local market combined with national trends, 2021 is going to be a year of record activity.  What is driving this trend?  A combination of factors:

• 1. Sales from 2020 spilling into 2021.  When COVID first hit in 2020, it threw off the investment year for buyers and sellers.  Many deals that didn’t move forward in 2020 came to market in 2021.
• 2. Buyers seeking stability.  In times of uncertainty, which we have seen throughout the year, investors seek to invest in stable returns regardless of uncertainty.  Multifamily is the most favored asset class for investors, driving a further increase in activity.
• 3. 2022 tax uncertainty.  The new federal administration and many states have proposed sweeping tax changes for 2022, causing many owners to sell their assets in 2021 to avoid tax consequences if those proposals come to fruition. 
• 4. Rent Growth.   As rent has climbed, especially in the Inland Northwest, values have climbed as well. Multifamily is more valuable to investors when rents can be increased steadily each year driven by demand, low turnover, and low vacancy. 

• These combined factors – especially historical pressure from 2020 and future pressure avoid 2022 changes – have caused the perfect storm for investment activity in 2021.
• At this point in the year, many investors are wondering, what’s next for 2022?  I believe the movement of capital this year will spill into next year, especially driven by 1031 exchanges from sales this year.  At the same time, investment activity for the full year may cool off, but without a decrease in values or rents, just a decrease in overall levels of sales activity.

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Local News

• I recently reviewed an in-depth report from on the Tri-Cities, WA from TRIDEC, the local economic development council, and these stats jumped out at me: 

• The Tri-Cities has grown into a $14.65 billion economy following 5.8% job growth between 2015 and 2020.
• Tri-Cities local entrepreneurs grew 8.4% between 2015 and 2020, contributing large share of the economic growth.
• 21.7% of the net migration to the Tri-Cities came from Yakima County in 2019, with King County as the second-highest source of net migration.
• Generation dynamics - the Tri-Cities is made up of 19.7% Baby Boomers, lower than Washington State at 22.2%, helping cushion the impact of this generation exiting the workforce over the next 10 years.

• A Department of Energy grant for $6.65M is spurring a $12M project in Spokane for utility decarbonization, an exciting project underway in Spokane.

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Development

• Across markets, developers are facing more uncertainty than ever before.  Most investors agree that rent growth will persist along with inflation for another 24 months, but beyond that timeline, the future is very uncertain.  
• Developers are making investments today that will come to life in 2-3 years, making the planning and investment process uncertain.  Add on top of that, cost inflation, supply chain issues, and household population growth slowing nationally, and developers are mostly focusing on short-term projects and solid fundamentals, making sure to estimate expanded cap rates and interest rates, and lower rent growth than we’ve seen in the last 2 years. 
• In the Tri-Cities, there are multiple public-private projects that have been years in the making that are finally coming to life!  The Port of Kennewick’s Vista Field and Columbia Gardens projects are making their way to the public sector for sale.  These are going to drive tremendous commercial activity locally, opening up supply for new construction in a dense urban core, which the Tri-Cities has not seen historically.

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Here’s to a record-breaking Q4 and profitable business decisions for buyers, sellers, and all investors! 

P.S. My family and I are about to welcome our second-born in the next few days. We are grateful to call the Inland Northwest our home and be able to raise our family here!  Want to stay in the loop on real estate and family?  You can find me on Twitter, sharing fun family stories and market updates like the above.  Come join me!

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Best,

Mason Fiascone